Legal Process Outsourcing (LPO): A sunshine outsourcing sector

November 3, 2009

In recent years, legal process outsourcing (LPO) has emerged as a sunrise outsourcing industry offering a huge potential cost savings for both law firms and corporations with large legal departments along with significant opportunities for outsourcing vendors and offshore locations.

1. LPO growth
Legal process outsourcing is simply the practice of obtaining external legal support services from a legal support services company that often has its operations based offshore. Although the industry has existed in some form or another for decades, offshore LPO received a huge boost in 2006 when so called “e-discovery laws” were enacted in the USA. This set of regulations was created to govern the storage and management of electronic data for federal court actions and hence, and literally overnight, the sheer volume of litigation information that needed to be stored, archived and reviewed swelled tremendously. Given the lack of enough affordable lawyers and paralegals in the USA to perform the new workload required by law, law firms and the legal departments of major corporations were forced to look for offshore alternatives.

Today, LPO clients are typically law firms or in-house legal departments of large multinational corporations and the services they typically seek include legal research, patent research, documentation writing, document review, and the drafting of pleadings and legal briefs. In other words, the legal work that is typically outsourced to an LPO vendor would be the type of routine legal and corporate secretarial work performed by paralegals and junior lawyers.

This will largely remain the case as a lawyer based in one country generally cannot practice law in another country due to the fact that the legal profession is governed by unique and intricate ethical and licensure rules set by jurisdiction. Hence, a November 2008 Wall Street Journal article quotes Forrester Research as estimating that only 35,000 USA based legal jobs will be moved offshore by 2010 and 79,000 will be moved offshore by 2015 –a small portion of the estimated 1.2 million licensed lawyers in the country.

Nevertheless, given that the legal provision is both well known for and despised for its high fees; LPO still has huge growth potential because it offers enormous cost savings. A 2004 article in the New York Times estimated that offshore LPO can save some companies as much as 50% while a more recent 2008 USA Today article states that some LPO companies will charge as little as US$25 an hour for work that would otherwise cost more than US$125 an hour in the USA. Furthermore, an April 2008 Time Magazine cites a 2007 Altman Weil survey that shows that law firm partners in the USA bill at a national average of US$318 per hour and this rate rises to US$550 per hour at large New York City law firms while starting salaries at large and prestigious law firms can average US$160,000 a year. Thus, even a simple legal problem can end up costing hundreds of thousands of dollars a year in legal fees.

Moreover, cost savings from LPO come not just in form of salary or savings on legal fees but also in the form of savings on rent since many of the expenses associated with running a corporate legal department or a large law firm, especially a high end corporate law firm based in a major city like New York or London, are rent and real estate related. Thus, any cost savings achieved by LPO has the potential to level the legal playing field as individuals and smaller law firms and companies may now have a better chance of taking on or defending themselves from entities with deep pockets while LPO also means that they can have an amount of work done that rivals the scale of what can be obtained for affordable rates in the USA or UK.

2. Major LPO Offshore Destinations
In addition, the basic structural nature of legal systems around the world gives a tremendous boost to the LPO industry as the most obvious destination for offshore LPO type of work would be a country or countries with legal systems that are structurally similar. Hence, legal work originating from countries with civil legal systems based upon Roman law or the Napoleonic code which includes most continental European countries, could potentially be outsourced to Latin American and African countries that were colonized by France or Spain as their overall legal systems would be structurally similar. Likewise, countries with common law systems in place, generally those that were colonized by Great Britain, would also share the same basic legal framework. Thus, India and the Philippines have emerged as leading offshore LPO destinations while other countries also have the potential to perform LPO type of work.

2.1. India
India by far is the preeminent LPO provider given its common law system, widespread use of the English language, and huge talent pool. In fact, 300,000 Indians enroll into law schools every year across India and the industry offers an attractive career alternative as India’s overburdened and understaffed court system is characterized by backlogs and delays while many law firms in the country remain family affairs.

Thus and according to a 2008 Washington Post article, India’s LPO industry has been growing 60% annually for the past three years and will employ at least 24,000 people and earn US$640 million in revenue by 2010. Meanwhile, a December 2008 Washington Times article quotes Evaluserve as predicting that India’s LPO industry will grow from US$52 million in revenue back in 2005 to US$970 million in 2015. The article further mentions that 70 new legal outsourcing firms have opened in the country just in previous six months alone. In addition, a November 2008 Wall Street Journal article states that India’s LPO industry earns around US$250 million per year and further points out that starting salaries for associates at big USA firms are often more than US$200 per hour but experienced lawyers in India bill at US$75 to US$100 per hour or roughly what some USA based paralegals charge.

However, Indian LPO employees still need rigorous training in order to become familiar with USA legal and judicial practices. Furthermore, Indian legal professionals are accustomed to writing in flowery British style English and not the short and straight to the point writing style that Americans are accustomed to using – especially in the legal profession. Hence, Indian LPO professionals will literally need to relearn English, specifically American English, before taking on any project that involves legal writing.

2.2. The Philippines
And just like India, the Philippines also has a large English speaking population, low labor costs, and a legal system that is actually an amalgamation of the world’s major legal systems including Roman Civil Law and the Catholic Church’s Canon Law that was inherited from the Spanish, English Common Law that was inherited from the USA and Islamic Law. Moreover, the country has a plentiful supply of legal professions as the Integrated Bar of the Philippines currently has more than 40,000 members nationwide and there are 105 law schools in the country capable of producing thousands of graduates with a legal background every year.

Although these figures are smaller than the number of legal professionals available in India, a September 2006 Business Week article points out that Philippines based legal professionals have an added advantage over their Indian counterparts because they generally know what Roe vs. Wade and other key USA legal decisions are as most lawyers in the country also sit for USA bar exams. Furthermore, as another September 2006 Business Week article points out, Filipino lawyers are competitive on the cost front as a lawyer with five years of experience can be hired for US$30,000 a year including benefits – half of what an experienced USA based corporate paralegal would earn and on-fifth of what a New York based first year attorney can earn.

2.3. Other Countries
In addition, LPO work is not just confined to low cost countries and LPO decisions alone are not just made for the cost savings. In fact, the 2004 New York Times article mentioned a USA based telecom company that relies on a patent firm based in New Zealand. The USA based firm was impressed with the engineering knowledge of the New Zealand lawyers after working with them on a past acquisition project and the fact that current exchange rates at the time meant that the New Zealanders charged 30% less in fees than their American counterparts. Thus, legal professionals in other developed countries also have the opportunity to leverage their specialized skills, knowledge and exchange rate differentials to do LPO type of work.

3. Issues and Concerns
Nevertheless and despite the obvious potential for outsourcing legal work, offshore LPO has sparked controversy and concerns – especially among the paralegal community who view their livelihood to be under threat by the LPO trend. Paralegals will often cite issues surrounding security, confidentiality and language barriers as their chief concerns but a far greater concern may come from the fact that new junior lawyers will have fewer chances to gain legal experience doing the traditional grunt work assigned to them.

Moreover, LPO work performed overseas will still need careful supervision as well as input from the client side to ensure that their work complies with the ethical and legal norms of the country where the work originates from. In fact, an April 2008 India Business Law Journal pointed out that problems tend to develop due to unrealistic client expectations or LPO clients who take a “wash-their-hands” approach to the work they are having outsourced. Furthermore, the article warns of “fly-by-night” LPO shops who offer legal services in areas that they do not have expertise in or do not have proper security measures in place. These are seen as major problems for the industry as there is no regulatory body or watchdog group to keep an eye on them. In other words, the entire LPO industry may be just one devastating and well publicized security breach away from having international confidence in it destroyed.

4. LPO Vendors and Vendor Selection
Hence, the onus is on the client to protect themselves by initially and carefully selecting a reputable LPO vendor. LPO Vendors such as Los Angeles based Integreon and LawScribe, New York based Pangea3 and global KPO provider Evaluserve all have good track records for confidentiality, quality control and security measures. Standard operating procedures in their operations centers would include key card/ID entry systems; security cameras and guards; computers that lack USB ports; and all phones, handbags and purses banned from the office. Client information can even be stored on secure servers in the client’s home country as an added safety measure.

Furthermore, LPO clients will need to have a thorough understanding of a LPO vendor’s recruitment process and training policies and it should be considered critical that an offshore LPO have USA or UK trained lawyers occupying senior positions and require all employees to sign non-disclosure agreements upon hiring. Contracts between the LPO vendor and the client will need to be clear and contain provisions that outline what happens in the event of a security or confidentiality breach as well as contain the usual performance targets and penalties if targets are not met. In addition, sufficient time will be needed to clearly map out all of the legal processes in pilot projects to ensure that all documentation is accurate and that the team composition for the project is optimal.

Nevertheless, any law firm or corporation that chooses to outsource any legal work overseas will still need to ensure that all computer files are backed up in case any documents are lost due to a natural disaster or for another reason. Moreover, if the work being performed is considered to be of a sensitive nature, a lawyer from the client side will always need to review the work performed and ultimately bear responsibility if any of the work was done incorrectly as they are the ones who will need to answer directly to their own clients or to judges.

5. Conclusion
Although there is huge potential for growth and cost savings from LPO, there is an obvious limit to what legal work can be outsourced due to the complex ethical and licensure requirements that legal professionals must follow. Lawyers will always need to be admitted to a local jurisdiction’s bar in order to appear in court or to file legal proceedings while lawyers in some practice areas such as patent law will still need to be in their respective countries in order for their work to be effective. Hence, do not expect high level legal type work to be outsourced in the near future and clients still must proceed with caution when choosing to decide which LPO vendor to engage on a project. Nevertheless, LPO is clearly a sunshine outsourcing industry that offers enormous cost savings and thus, has the potential to significantly level the legal playing field.

Comments

Legal Process Outsourcing (LPO) is a part of a significant BPO service which deals with legal work that companies send out to more economical offshore places. LPO outsourcing has got to a wonderful position in the past few years in many countries especially in US. LPO companies of India have had successes in providing services such as text review, legal research and writing, drafting of pleadings and briefs and providing patent services

When outsourcing to foreign lawyers you need to assess whether their legal education is comparable to that of lawyers in the U.S. “In some nations, people can call themselves ‘lawyers’ with only a minimal level of training. Also, the professional regulatory system should be evaluated to determine whether members of the nation’s legal profession have been inculcated with core ethical principles similar to those in the United States, and whether the nation’s disciplinary enforcement system is effective in policing its lawyers.”

The last two points are particularly important, and underscore why the Philippines is the best option for legal process outsourcing. When outsourcing U.S. legal work, a complete understanding of the U.S. legal system is imperative. It comes as no surprise that the Filipino attorneys have a complete understanding of the U.S. system. As a result of the Spanish-American War, the Philippines was part of the U.S. territory from 1898 through 1946. During that time the United States had an enormous influence on all aspects of Filipino life not only in government, law and business, but culturally as well. In fact, English (U.S. dialect) is one of the two official languages of the Philippines, and is the predominant language used by professionals, including Filipino attorneys who write briefs and motion papers and argue in English.

The Filipino educational system, including university and graduate school, is modeled after the U.S. system. As in the U.S., a prospective student must complete a four year undergraduate degree and then obtain a J.D. The Filipino law school curriculum includes subjects that mirror the typical U.S. law school curriculum. In order to practice law in the Philippines, law school graduates must sit for the national bar exam. Considered one of the hardest bar exams in the world, the pass rate fluctuates between 18% and 28%. Moreover, the Philippines legal system is very similar to that of the U.S. It adopted the U.S. government structure, legal system, and principles of common law. U.S. Supreme Court decisions are often used as guidance by the Supreme Court of the Philippines. The Philippine Rules of Evidence are modeled after the U.S. Federal Rules of Evidence. Its laws—contract, tort, the parol evidence rule, statute of frauds, securities regulation, intellectual property and negotiable instruments—are similar, if not identical, to the U.S. equivalent. The Philippines even has a codified attorney client privilege rule. The Philippine Bar’s ethical rules, which are set out in the Code of Professional Responsibility (S.C., June 21, 1988) (Phil.), and their disciplinary enforcement under the Revised Rules of Court (Phil.) are very similar to U.S. rules and procedures. Clearly, the Philippine legal education and legal system are comparable with those of the U.S. See http://www.americandiscovery.com.

American Discovery is a leading provider for legal process outsourcing. Its legal staff is composed of lawyers from AmLaw 100 law firms and Filipino lawyers who are admitted to practice before the state bars of California and New York with at least 10 year law practice experience in the U.S. American Discovery has performed high level legal work, such as the preparation of privilege logs, document review, legal research and analysis and discovery consulting for AmLaw200 law firms and Fortune 500 corporations. See http://www.americandiscovery.com.

At our off-shore legal outsourcing company / LPO ( http://www.sddglobal.com ), we’ve seen how legal outsourcing actually creates more legal jobs in the West, rather than cutting them. Every time a deal is done, or a litigation is waged, because legal services are suddenly affordable, it means more work for the Western lawyers involved in supervision, editing, negotiating, and/or appearing in court.
For example, a Fortune 100 client of our U.S. parent law firm specifically requested that the legal research and analysis needed for a series of multi-million-dollar deals in the U.S. be done by Indian attorneys at our legal process outsourcing operation in Mysore. This is a situation where, if not for our parent law firm’s off-shoring capabilities, no lawyers would have been hired, because typical Western legal fees would have made it prohibitive. The work would have been done either in-house, or not at all. Because the India team made it possible for the deals to happen, Western law firms ultimately got more business, handling the otherwise non-existent transactions.

A similar phenomenon has happened in litigation, where corporate clients have chosen to defend themselves against meritless lawsuits, using both U.S. and Indian lawyers. The most high-profile examples are some of the cases filed in Los Angeles against comedian Sacha Baron Cohen. They have been dismissed instead of settled, because of the successful teamwork among attorneys in the U.S. and India. Without legal outsourcing, there might have been no U.S. lawyers hired for any significant litigation work at all, because frivolous cases often are settled at the outset, just to avoid the usual U.S. litigation costs. The off-shore outsourcing of legal work is leading to a new breed of benign tort reform, as defendants facing bogus or inflated tort claims are choosing to litigate and win. This in turn discourages such claims. And the money that otherwise would be spent by defendants on nuisance payouts can be plowed by corporations right back into the U.S. economy.